Floating rate note

A floating rate note is a form of security that carries a variable interest rate which is adjusted regularly by a margin against a benchmark rate such as LIBOR.

A floating rate note (FRN) is a form of security, invented in the euromarkets and adopted elsewhere, that carries a variable interest rate which is adjusted regularly (at one to six-monthly intervals - whatever is preferred by the issuer) by a margin against a benchmark rate such as LIBOR (the London Inter-Bank Offered Rate of Interest).

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Issued for three years or longer, FRNs are popular during periods of increased volatility in interest rates, when lenders may be reluctant to lend funds cheaply at a fixed period for a fixed rate.

For example, the issuer might agree that their FRN will pay 50 basis points (0.5%) over the rate of LIBOR. So if LIBOR was 6% over a six-month period (it is usually worked out as an average), the FRN would pay 6% plus the 0.5% spread, or 6.5% in total over the next six months.

A straight, or 'vanilla', eurobond would carry a fixed rate of interest regardless of LIBOR. One variation is an inverse FRN. Interest payments on these rise as interest rates fall, and vice versa.




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